In technical analysis, Trading Volume is an indicator that indicates the strength of market trend. Trading Volume, which is usually referred to as Volume, is simply the number of trades executed during defined time period.
For example, the daily volume of stock XYZ is the number of trades during a trading day. If one trader buys 100 shares of XYZ stock while another one trader sells 100 shares of XYZ stock, the orders are matched and executed. The volume is increased by 100 on that day. Therefore whether traders buy or sell securities the volume will be increased.
When analyze a price chart, volume is a measurement of the acceptance or rejection of market’s price at the specific level and time. Movements in trading volume may indicate traders’ sentiment or important events taking place in market.
Although volume is a powerful market tool that is used for technical analysis, many traders may not understand how it can be useful.
The basic guideline to analyze volume on price chart is if market’s price is increasing and market’s volume is also increasing, this indicates that the market is in bullish mode and it can support further price increases. This is opposite when the market is in bearish mode, when a market is decreasing in price but volume is increasing. It supports that price can further decrease.
However, a period of unusually and significant volume spikes when a substantial market price increase or decrease occurs after a long steady uptrend or downtrend. It might be a signal of market turning point or trend reversal.
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